Recently, much attention has been focused on the role private equity acquisitions are playing in the healthcare industry.
There are strong debates about the ultimate effect of private equity’s entry into the healthcare sphere. Private equity proponents point to its potential to speed technological advancements and improve efficiencies, while detractors of private equity in healthcare argue that the goals of private equity investors and medical professionals are diametrically opposed, creating a conflict of interest.
As always, the answer lies somewhere in the middle. Below, Arthur Lynch breaks down some of the things to consider when private equity acquisitions intersect with the provision of healthcare.
What types of private equity healthcare deals are most common?
The broad term “private equity” brings to mind top-secret hedge funds and other non-public investments; however, today’s private equity holdings include a number of pension and mutual funds. And despite the name, some private equity firms are actually publicly traded.
One of the most common ways private equity enters the healthcare sphere is with the leveraged buyout (“LBO”). In this type of acquisition, a private equity investment fund (which must include a general partner and investor partners) will put up the equivalent of a down payment (usually 20 to 30 percent of the purchase price) for a company that has been targeted for a takeover.
The rest of the capital is secured by the assets of the company being acquired, which means the seller leverages its own assets to allow the buyer to qualify to purchase the business. At the end of the holding period, the private equity fund will sell the company, either through a private sale, an initial public offering, or a special purpose acquisition company.
What makes healthcare a target of private equity purchasers?
Healthcare spending is higher than ever, representing nearly 20 percent of the U.S. gross domestic product (GDP). What’s more, healthcare investments have largely outperformed investments in other sectors, especially over the last 10 years, giving investors some cover when they delve into these businesses over other options.
As Lynch explains, “healthcare tends to be a recession-proof industry, and even after being shaken by the COVID-19 pandemic, the supply chain woes haven’t harmed the profitability of most healthcare providers and medical groups.” Furthermore, with aging populations, a declining average life expectancy, and increases in chronic diseases, depression, and anxiety, healthcare spending is likely to remain stable (and even more likely to increase) in the coming years.
What are some recent trends in private equity healthcare acquisitions?
Over the past decade, there have been two key trends in the private equity healthcare sphere. The first involves the consolidation of individual physician practices; the second is the outsourcing by hospitals of physician services.
Physicians who agree to private equity acquisition can see improved administrative efficiencies, lower per-provider costs for new technologies, and significantly more leverage when it comes to negotiating insurance reimbursement rates. Physicians who are on the retirement track may be able to reduce their tax burden by selling to a private equity company.
When it comes to outsourced physician staffing, private equity is ahead of the curve. Private equity investors have also set their sights on specialties, like pediatrics, dermatology, anesthesiology, radiology, and oncology, helping corner the market for these specialties in underserved areas.
What does the future hold for private equity in healthcare?
Proponents of private equity claim that this ownership and investment structure can help capture value in healthcare where other ownership and management structures have failed. “By providing more capital to medical providers, private equity can drive improvements in technology and patient care,” Lynch explains.
What’s more, many investors are still keeping their options open (and their cash in hand). With trillions in “dry powder” available, investors are itching for a way back into the sphere; new tech innovations and specialty practices for sale can present attractive investment opportunities. With the U.S. economy continuing along a rocky path, investing in assets in an essentially recession-proof industry can be a prudent and lucrative way to move forward.
About Arthur Lynch:
Arthur Lynch has a multifaceted background; he has played in the NFL and served in the United States Army. Mr. Lynch graduated from the University of Georgia in 2013 with a BA in History. He minored in political science and held honors such as the Dean’s List and Academic All-SEC.
He continued his studies at the University of Pennsylvania’s Wharton School of Business, attending the NFL Business Management & Entrepreneurial Program at Aresty Institute of Executive Education. Mr. Lynch studied finance and investment strategy and was one of only two first-year players to be accepted into the NFL BME program.